UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the transition period from to
------------------ ------------------
Commission File Number: 1-9595
BEST BUY CO., INC.
(Exact Name of Registrant as Specified in Charter)
Minnesota 41-0907483
(State of Incorporation) (IRS Employer Identification Number)
7075 Flying Cloud Drive 55344
Eden Prairie, Minnesota (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: 612/947-2000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES X NO
--- ---
At August 31, 1996, there were 43,222,061 shares of common stock, $.10 par
value, outstanding.
BEST BUY CO., INC.
FORM 10-Q FOR THE QUARTER ENDED AUGUST 31, 1996
INDEX
Page
----
Part I. Financial Information
Item 1. Consolidated Financial Statements:
a. Consolidated balance sheets as of August 31, 1996, 3-4
March 2, 1996 and August 26, 1995
b. Consolidated statements of earnings for the 5
three and six months ended August 31, 1996
and August 26, 1995
c. Consolidated statement of changes in shareholders' 6
equity for the six months ended August 31, 1996
d. Consolidated statements of cash flows for the 7
six months ended August 31, 1996, and
August 26, 1995
e. Notes to consolidated financial statements 8
Item 2. Management's Discussion and Analysis of Financial 9-12
Condition and Results of Operations
Part II. Other Information
Item 4. Submission of matters to a vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
2
Part I - Financial Information
Item 1. Consolidated Financial Statements
BEST BUY CO., INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
($ in 000, except per share amounts)
August 31, March 2, August 26,
1996 1996 1995
(Unaudited) (Unaudited)
---------- ---------- ----------
CURRENT ASSETS:
Cash and cash equivalents $ 30,670 $ 86,445 $ 43,693
Receivables 125,870 121,438 116,474
Recoverable costs from developed
properties 96,935 126,237 147,182
Merchandise inventories 1,447,382 1,201,142 1,269,060
Deferred income taxes 21,143 20,165 18,009
Prepaid expenses 11,975 5,116 7,035
---------- ---------- ----------
Total current assets 1,733,975 1,560,543 1,601,453
PROPERTY AND EQUIPMENT, at cost:
Land and buildings 16,734 16,423 15,414
Property under capital leases 29,177 29,421 28,435
Leasehold improvements 137,335 131,289 107,177
Furniture, fixtures, and equipment 295,716 266,582 229,006
---------- ---------- ----------
478,962 443,715 380,032
Less accumulated depreciation and
amortization 161,445 132,676 111,212
---------- ---------- ----------
Net property and equipment 317,517 311,039 268,820
OTHER ASSETS:
Deferred income taxes - 7,204 11,058
Other assets 12,912 12,046 20,151
---------- ---------- ----------
Total other assets 12,912 19,250 31,209
---------- ---------- ----------
TOTAL ASSETS $2,064,404 $1,890,832 $1,901,482
---------- ---------- ----------
---------- ---------- ----------
See notes to consolidated financial statements.
3
BEST BUY CO., INC.
CONSOLIDATED BALANCE SHEETS (continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
($ in 000, except per share amounts)
August 31, March 2, August 26,
1996 1996 1995
(Unaudited) (Unaudited)
---------- ---------- ----------
CURRENT LIABILITIES:
Note payable, bank $ 208,000 $ - $ 150,000
Obligations under financing arrangements 105,716 93,951 22,851
Accounts payable 619,515 673,852 643,926
Accrued salaries and related expenses 29,043 26,890 28,801
Other accrued liabilities 143,300 125,582 117,471
Deferred service plan revenue
and warranty reserve 27,504 30,845 28,645
Accrued income taxes - - 2,641
Current portion of long-term debt 16,035 23,568 23,124
---------- ---------- ----------
Total current liabilities 1,149,113 974,688 1,017,459
Deferred Service Plan Revenue and Warranty
Reserve, Long-Term 35,433 48,243 49,558
Long-Term Debt 209,927 206,287 212,143
Convertible Preferred Securities of Subsidiary 230,000 230,000 230,000
SHAREHOLDERS' EQUITY:
Preferred stock, $1.00 par value;
authorized 400,000 shares; none issued
Common stock, $.10 par value; authorized
120,000,000 shares; issued and
outstanding 43,222,000, 42,842,000,
and 42,670,000 shares, respectively 4,322 4,284 4,267
Additional paid-in capital 240,474 236,392 234,750
Retained earnings 195,135 190,938 153,305
---------- ---------- ----------
Total shareholders' equity 439,931 431,614 392,322
---------- ---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,064,404 $1,890,832 $1,901,482
---------- ---------- ----------
---------- ---------- ----------
See notes to consolidated financial statements.
4
BEST BUY CO., INC.
CONSOLIDATED STATEMENTS OF EARNINGS
($ in 000, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
------------------------- -------------------------
August 31, August 26, August 31, August 26,
1996 1995 1996 1995
---------- ---------- ---------- ----------
Revenues $1,778,640 $1,437,911 $3,415,824 $2,712,607
Cost of goods sold 1,526,974 1,241,290 2,931,508 2,333,698
---------- ---------- ---------- ----------
Gross profit 251,666 196,621 484,316 378,909
Selling, general and administrative
expenses 231,982 177,418 451,680 343,343
---------- ---------- ---------- ----------
Operating income 19,684 19,203 32,636 35,566
Interest expense, net 13,475 9,726 25,756 18,342
---------- ---------- ---------- ----------
Earnings before income taxes 6,209 9,477 6,880 17,224
Income taxes 2,421 3,763 2,683 6,838
---------- ---------- ---------- ----------
Net earnings $ 3,788 $ 5,714 $ 4,197 $ 10,386
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net earnings per share $ 0.09 $ 0.13 $ 0.10 $ 0.24
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average common shares
outstanding (000) 43,814 43,623 43,708 43,622
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
See notes to consolidated financial statements.
5
BEST BUY CO., INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED AUGUST 31, 1996
($ in 000)
(unaudited)
Additional
paid-in Retained
Common stock capital earnings
------------ ---------- --------
Balance, March 2, 1996 $ 4,284 $236,392 $190,938
Stock options exercised 38 4,082
Net earnings, six months ended
August 31, 1996 4,197
-------- -------- --------
Balance, August 31, 1996 $ 4,322 $240,474 $195,135
-------- -------- --------
-------- -------- --------
See notes to consolidated financial statements.
6
BEST BUY CO., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in 000)
(unaudited)
Six Months Ended
-------------------------
August 31, August 26,
1996 1995
---------- ----------
OPERATING ACTIVITIES:
Net earnings $ 4,197 $ 10,386
Charges to earnings not affecting cash:
Depreciation and amortization 33,872 25,971
-------- --------
38,069 36,357
Changes in operating assets and liabilities:
Receivables (4,432) (32,034)
Merchandise inventories (246,240) (361,383)
Prepaid income taxes and expenses 1,318 (9,251)
Accounts payable (54,337) 255,575
Other current liabilities 19,871 29,562
Deferred service plan revenue and warranty
reserve (16,151) 11,123
-------- --------
Total cash used in operating activities (261,902) (70,051)
INVESTING ACTIVITIES:
Additions to property and equipment (40,350) (55,682)
Recoverable costs from developed properties 29,302 (60,960)
Increase in other assets (866) (393)
-------- --------
Total cash used in investing activities (11,914) (117,035)
FINANCING ACTIVITIES:
Borrowings on revolving credit line, net 208,000 150,000
Increase(decrease) in obligations under
financing arrangements 11,765 (58,904)
Long-term borrowings 13,000 -
Payments on long-term debt (16,893) (7,331)
Common stock issued 2,169 2,314
-------- --------
Total cash provided by
financing activities 218,041 86,079
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (55,775) (101,007)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 86,445 144,700
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 30,670 $ 43,693
-------- --------
-------- --------
Amounts in this statement are presented on a cash basis and therefore may differ from
those shown in other sections of this quarterly report.
Supplemental cash flow information:
Cash paid (received) during the period for:
Interest $ 25,424 $ 18,805
Income taxes $ (4,110) $ 20,165
See notes to consolidated financial statements.
7
BEST BUY CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The consolidated balance sheets as of August 31, 1996, and August 26,
1995, the related consolidated statements of earnings for the three and
six months ended August 31, 1996 and August 26, 1995, the consolidated
statements of cash flow for the six months ended August 31, 1996 and
August 25, 1995 and the consolidated statement of changes in shareholders'
equity for the six months ended August 31, 1996, are unaudited; in the
opinion of management, all adjustments necessary for a fair presentation
of such financial statements have been included and were normal and
recurring in nature. Interim results are not necessarily indicative of
results for a full year. These interim financial statements and notes
thereto should be read in conjunction with the financial statements and
notes included in the Company's Annual Report to Shareholders for the
fiscal year ended March 2, 1996.
2. RECLASSIFICATION:
Certain prior year amounts have been reclassified to conform to current
year presentation.
3. INCOME TAXES:
Income taxes are provided on an interim basis based upon management's
estimate of the annual effective tax rate.
4. EARNINGS PER SHARE:
Earnings per share relate to fully diluted earnings per share.
8
BEST BUY CO., INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net earnings for the second quarter of fiscal 1997 were $3,788,000, or $.09 per
share, compared to net earnings of $5,714,000, or $.13 per share, in the
comparable period last year. For the first six months of the current fiscal
year net earnings were $4,197,000, or $.10 per share compared to $10,386,000, or
$.24 per share for the same period last year. An improvement in gross margins
was offset by higher selling, general and administrative expenses resulting in
reduced operating income as a percentage of sales in the current year periods.
Higher interest expense during the current periods also applied pressure on
earnings.
Revenues in the second quarter increased 24% to $1.779 billion compared to
$1.438 billion in the second quarter last year. Revenues for the year to date
period increased 26% to $3.416 billion. The increases were due mainly to the
contribution from the 38 new stores opened in the past twelve months and a
comparable store sales increase of 4% during both the quarter and year to date
periods. The Company has opened eleven new stores during the current fiscal
year, including five stores in the new market of Philadelphia, Pennsylvania, on
May 3. The Company operated 262 stores at August 31, 1996 compared to 224
stores at August 26, 1995. Comparable store sales results in the quarter and
year to date periods benefited from the increased assortment of major appliances
which the Company introduced in May. The appliance category was significantly
expanded in the current fiscal year with the addition of the Amana, General
Electric, GE Profile, Hotpoint, and Tappan brand names. However, industry-wide
softness in the consumer electronics category and a relatively mild summer,
resulting in sluggish sales of air conditioners as compared to last year, put
pressure on comparable store sales results. Total Company comparable store
sales results in the second half of this fiscal year are expected to be lower
than the first half reported results with some months likely to be negative.
Last year the Company reported comparable store sales increases of 11% and 1% in
the third and fourth quarters, respectively.
Retail store sales mix by major product category for the second quarter and six
month period was as follows:
Second Quarter Ended Six Months Ended
-------------------- ------------------
8/31/96 8/26/95 8/31/96 8/26/95
------- ------- ------- -------
Home Office 39% 40% 40% 40%
Consumer Electronics
Audio 12% 13% 12% 13%
Video 17% 17% 17% 18%
Entertainment Software 14% 15% 14% 15%
Appliances 11% 10% 10% 9%
Other 7% 5% 7% 5%
---- ---- ---- ----
Total 100% 100% 100% 100%
---- ---- ---- ----
---- ---- ---- ----
9
The Company plans to open ten additional new stores during the remainder of the
current fiscal year, including entry into the new markets of Tucson, Arizona,
Fresno, California, Tampa, Florida, and Memphis, Tennessee, in the third
quarter.
Gross profit margin was 14.1% of sales in the second quarter of this year, and
14.2% for the first half compared to 13.7% and 14.0% in the comparable periods
of last year. Gross profit margin improved in both periods compared to the
prior year, as increased contributions from the sale of higher margin appliances
and extended service plans helped offset margin lost from lower air conditioner
sales. Sales of extended service plans increased to 1.8% and 1.6% of store
sales in the second quarter and first half, respectively, compared to .9% in the
comparable periods last year. Extended service plans sold in the current year
periods are administered by a third party, resulting in recognition of revenue
and profit on the sale of the plans at the time of sale. Prior to the fourth
quarter of fiscal 1996, revenue and profit from extended service plans was
recognized over the term of the contract. Competition and promotional activity
are expected to continue to apply pressure on margins; however, management
believes that increased contributions from appliances and extended service plans
provide an opportunity to increase overall margins in fiscal 1997 as compared to
the prior year.
Selling, general and administrative (SG&A) expenses increased to 13% of sales
compared to 12.3% in the second quarter of the prior year. For the six month
period the ratios were 13.2% and 12.7%, in the current and prior years,
respectively. The increase is mainly due to higher occupancy and fixed costs
associated with the new stores located in generally more expensive markets, 15
remodeled/relocated stores and distribution capacity added in the past twelve
months. Costs associated with improving sales execution and supporting the
expanded appliance assortment also have impacted the Company's SG&A expense
ratio in the first half of fiscal 1997. The Company's slower rate of sales
growth in the current fiscal year, both in terms of the number of new stores
opened and comparable store sales increases, will cause the SG&A ratio for the
year to be higher than fiscal 1996's ratio of 11.3%.
Net interest expense increased $3.7 million in the second quarter and $7.4
million in the first six months compared to fiscal 1996. The increase was due
principally to a higher level of completed properties held for sale and
borrowings to support higher inventory levels. Additionally, in the first half
of fiscal 1996 the Company financed a portion of its working capital with the
proceeds from the $230 million November 1994 preferred securities offering.
10
FINANCIAL CONDITION
Working capital of $585 million at August 31, 1996 was unchanged from the prior
fiscal year end as cash, bank borrowings and inventory financing arrangements
were used to support higher inventories and reduce accounts payable.
Inventories increased 14% compared to August 26, 1995 due to the addition of the
new stores and the increased appliance assortment. In addition, cost of goods
sold increased 26% compared to the first six months of the prior year. Deferred
service plan revenues and the related deferred income taxes are decreasing as
revenues from plans sold prior to the fourth quarter of fiscal 1996 are
recognized. Revenues from extended service plans sold in subsequent periods are
recognized at the time of sale.
At August 31, 1996, the Company owned ten operating retail locations that were
available for sale and leaseback and included in recoverable costs from
developed properties. The Company also owns four retail locations under
development for openings later in the current fiscal year, as well as two sites
to be developed for fiscal 1998 store openings. Proceeds from the sale of
developed properties were approximately $42 million in the first six months of
the fiscal year and another $15 million subsequent to the end of the second
quarter. For the first six months of fiscal 1997 the Company's net cash flow
from developed properties was a positive $29 million compared to a net outflow
of $61 million in the first half of the prior year. The Company expects to sell
and lease back most of the remaining operating properties, as well as the retail
locations under development for fiscal 1997 openings, prior to the current
fiscal year end. Conditions in the marketplace for retail real estate and the
economy in general may affect the timing of sale/leaseback transactions.
During the first six months of fiscal 1997 the Company obtained $13 million from
intermediate term equipment financings. Subsequent to August 31, 1996, the
Company completed an additional $8.5 million in 5-year equipment financing. In
June, the Company repaid the $8.7 million contract for deed on its corporate
headquarters facility. The Company plans to obtain a long-term mortgage on this
facility. The Company currently expects that capital spending for the fiscal
year, exclusive of property development costs anticipated to be recovered
through long-term financing, will approximate $85 million.
Management expects that funds available through cash flow from operations, the
Company's credit facility, inventory financing facilities and customary vendor
terms, will be sufficient to meet the Company's working capital needs for the
fiscal year.
11
SAFE HARBOR PROVISIONS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
The Company filed a Current Report on Form 8-K on May 8, 1996, with the
Securities and Exchange Commission. The Report contains cautionary statements
identifying important factors that could cause the Company's actual results to
differ materially from those projected in forward looking statements made by the
Company herein.
12
BEST BUY CO., INC.
Part II - Other Information
Item 4. Submission of matters to a vote of Security Holders.
a) The Regular Meeting of the Shareholders of the Company was held June 19,
1996. The following individuals were elected at the meeting as Directors
of the Company to serve until the 1998 Regular Meeting of Shareholders.
Shares voted in favor of these directors and shares withheld were as
follows:
Bradbury H. Anderson
Shares For 39,962,878
Shares Withheld 178,782
Frank D. Trestman
Shares For 39,961,588
Shares Withheld 180,072
David Stanley
Shares For 39,963,227
Shares Withheld 178,433
James C. Wetherbe
Shares For 39,963,653
Shares Withheld 178,007
The other matter voted on and the results of voting were as follows:
Shareholders ratified the appointment by the Board of Directors of Ernst &
Young, LLP as the corporation's independent auditor for the fiscal year
beginning March 3, 1996, with shares voted as follows:
Shares For 39,998,427
Shares Against 76,268
Shares Abstaining 66,965
13
Item 6. EXHIBITS AND REPORTS ON FORM 8-K:
a. Exhibits: Method of Filing
----------------
11.1 Computation of net earnings
per common share Filed herewith
27.1 Financial Data Schedule Filed herewith
b. Reports on Form 8-K:
None
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BEST BUY CO., INC.
(Registrant)
Date: October 11, 1996 By: /s/ ALLEN U. LENZMEIER
-------------------------------------
Allen U. Lenzmeier, Executive Vice
President & Chief Financial Officer
(principal financial officer)
By: /s/ ROBERT C. FOX
-------------------------------------
Robert C. Fox, Senior Vice President-
Finance & Treasurer (principal
accounting officer)
15